Saturday October 2, 2004 - 12:46:05 GMT
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INVESTICA Ltd - www.investica.co.uk
Forex: Dollar looks for payroll boost
US rates at 2.0% would help support the US currency as the yield gap over Euros would close and this would alleviate carry-trade dollar selling. While the expectations of a Fed rate hike are intact, the dollar will secure some protection. The underlying questions over US growth have not been answered over the past week. Immediate data should remain firm, but there will be growing concern over the implications of high oil costs. The US dollar will be vulnerable if the forthcoming data puts a November rate interest hike in jeopardy. The markets will aim to push the Euro higher after the break above important resistance this week, but there will still be barriers to strong Euro gains, especially with a substantial number of long speculative Euro positions.
US data releases:
ISM index manufacturing 58.5 Sep (59.0 Aug)
Consumer confidence 96.8 Sep (98.7 Aug)
Jobless claims 369,000 week ending Sep 24th (351,000 prev)
The dollar lost support at the 1.2350 level on Thursday and this pushed the dollar down to a low of 1.2435 before a slight rally to 1.24 in New York on Friday. The break above 1.2350 is potentially significant as the markets will try to push the Euro higher in the short term. There are, however, a substantial number of long Euro positions and this will make it difficult for the Euro to make further near-term progress.
The US data has been mixed and did not offer clear direction. Consumer confidence dipped to 96.8 in September from 98.7 in August and there was also a rise in jobless claims to 369,000 from 351,000 the previous week. The Chicago PMI index strengthened to 61.3 in September from 57.3 the previous month while the national PMI index dipped to 58.5 in September from 59.0 in August.
Oil prices have remained an important focus with prices pushing above the US$50 p/b level due to supply fears. There was a temporary decline after progress was reported in the Nigerian disputes, but prices ended above the US$50 level in New York for the first time. There are likely to be increased fears that US growth will be damaged by prices at this level. At this stage, the Fed is still on track to increase interest rates again in November to 2.0%. This would match the level of Euro rates and would help stem selling pressure on the US currency due to a reduction in carry trades. Disappointing US growth figures would, however, put this tightening in jeopardy and would also be likely to undermine the dollar.
Treasury bond yields dipped below the 4.0% level early in the week and, despite a rally in yields over the second half of the week, there has been evidence of a flow of funds into high-yield currencies. There have, for example, been significant gains for the Canadian and Australian dollars. Any signs of a pause in US tightening would maintain the flow of funds into high yields.
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